Losing Track: Accounting Problems Dog Arkansas Cities, Agencies

Losing Track: Accounting Problems Dog Arkansas Cities, Agencies
Bruce Engstrom, a state lottery commissioner and partner in accounting firm EGP PLLC of North Little Rock, says accounting errors by cities and state agencies are caused by a breakdown of oversight and controls. (Hannah Pfeiffer)

What do Altheimer, Bauxite, Blytheville, Eudora, Gould and Helena-West Helena have in common with the Arkansas Scholarship Lottery and the Arkansas Forestry Commission?

They are all governmental entities with accounting problems.

The problems range in kind and dollar value, but throughout the state they’ve resulted in lost jobs, ballooning tax bills and strained services in some already financially limited places.

“One thing they have in common is a breakdown in oversight and controls,” said Bruce Engstrom, state lottery commissioner and senior partner in accounting firm EGP PLLC in North Little Rock. Engstrom is certified in financial forensics.

The Arkansas Lottery, as an example of a state agency with accounting problems, was charged about $100,000 last year by the Internal Revenue Service for making late deposits of tax payments from 2010 lottery winnings. It was the lottery’s second such infraction.

Jon Moore, deputy legislative auditor in charge of state agencies for the Arkansas Division of Legislative Audit, said “mostly human error” had resulted in state agencies misusing funds.

He mentioned the Forestry Commission, where it was discovered last November that earmarked federal grant funds were being used to subsidize payroll.

Most state agencies use computer programs to manage funds, and the Division of Legislative Audit annually audits state programs that receive more than $26.1 million in federal dollars. Both practices reduce the number of errors made within large federally funded programs, Moore said. 

Smaller agencies rarely received enough federal program money to require a regular compliance audit. Agencies that get between $2.6 million and $26.1 million in federal funds get audited irregularly for federal compliance, Moore said.

All government agencies have a financial audit annually or nearly annually, but not all of their federally funded programs are audited for compliance. 

About 88 percent, or $7.7 billion, of the federal program money entering the state got audited last year.

But all state agencies should have internal controls in place to manage their resources, and all should know the federal requirements for the funds they receive, Moore said.

“You can’t rely on the audit to come in and tell you what’s wrong,” he said.

The 377 federal programs valued at less than $2.6 million each almost never get audited, even though they involved a combined total of $144 million last year.

Forestry’s federal program fell within the middle category, receiving more than $2.6 million but less than $26.1 million.

Forestry’s misuse of federal funds, which, according to Moore, likely began in 2007, inspired the Division of Legislative Audit to look more closely at the small federal programs. Division staffers realized that financial actions based on misinterpretations of laws could grow into significant misuse of money if unchecked for years, Moore said.

Starting this year, legislative auditors will annually dip into their division’s special-projects funds to pay to audit about five randomly chosen federally funded programs from both the middle and smallest categories.

The small programs individually don’t pose much of a threat to state finances, but taken together the risk “can be very significant, especially if we’re aware that there might be a problem statewide,” Moore said.
Cities and Towns
For cities and towns, a shortage of manpower in both numbers and skills can result in significant accounting problems, even if they are audited every year or two.

“The smaller the governmental entities become, the smaller the salaries being paid to the people. Typically, the smaller the salaries, you attract less qualified people,” EGP’s Engstrom said. “It takes commitment from a governmental entity to fully staff positions. It’s hard to do in a small city or small county or small school district.”

In January 2011 when Johnny McMahan became mayor of Bauxite (Saline County), population 487, he discovered that the former mayor and clerk treasurer hadn’t been paying the town’s payroll taxes consistently.

Only the IRS seemed to know the extent of the problem. The feds suddenly withdrew $13,000 from Bauxite’s general fund, leaving McMahan scrambling to find out what happened.

He and his new staff uncovered months’ worth of unopened IRS letters that had been tucked in drawers and boxes around the city’s offices. “Whether they did it on purpose or not, I don’t know,” McMahan said of the prior administration.

Bauxite owed the IRS more than $36,000 in payroll taxes and penalties, or nearly 4 percent of the city’s annual budget of less than $1 million. 

McMahan, who is a part-time employee, laid off three full-time officers, dropping the police department’s full-time staff to one and cutting into the salaries and payroll taxes the city couldn’t afford.

June Barron, the state’s deputy legislative auditor for cities and counties, said mistakes at the city level often reflect ignorance of state Municipal Accounting Law.

Cities or towns fail to reconcile bank accounts, don’t maintain invoices for disbursements and don’t keep current records of assets, she said.

Not all errors result in penalties, but failing to remit payroll taxes or paying late does cost.  “They become very expensive once the IRS tacks on the penalties and interest,” Barron said.

Blytheville found that out the hard way. It didn’t file forms correctly and didn’t pay payroll taxes in 2009 and much of 2010 and ended up owing $2.3 million in unpaid taxes plus $1.4 million in interest and penalties, Barron said.

That’s nearly $240 for each of Blytheville’s 15,620 residents.